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Fulgent ( FLGT ) is at the epicenter of the Covid world. Unlike countless other analysts, I do assert some value to the Covid business. That being said, I declare that paying 6x forward sales for the next-generation sequencing (NGS) business (excluding Covid NGS) is likely to be cheap enough.
Note, there are countless assumptions here. Whenever possible, I’ve attempted to make realistic assumptions, while erring on the side of caution. Revenue Growth Rates Aren’t The Full Story
Source: author’s calculations, **company guidance
Fulgent is guiding for Q4 2021 to be down 36% y/y. Typically, that’s a clear pass for me, but there’s a lot more here than meets the eye, as you know.
For our purposes, Fulgent has two segments. ( Source )
Fulgent has its Covid segment and its Core segment.
Fulgent’s COVID segment, the market is fully discarding. There’s a puff left on that cigar, but there are so many different variables that it’s so unpredictable, that rather than investors affording some value to this segment, investors are just fully discarding that revenue stream altogether.
Then, Fulgent has its core segment. Source: author’s calculations; **company guidance
As you can see above, for Q4 2021, 17% of Fulgent’s Q4 2021 revenues will come from its Core segment.
Of that 17%, here’s the breakdown from next-generation sequencing (”NGS”) from COVID versus the rest of Fulgent. Source: author’s calculations
As you can see above, the majority, approximately 83% of Fulgent’s Core revenues have absolutely nothing to do with COVID. (Source – Company Presentation)
Accordingly, even though the Core revenues were up nearly 300% y/y, some more details are needed here.
For Q3 2021, during the earnings call , management highlighted to investors that the Core business excluding COVID NGS was up 160% y/y.
That being said, that revenue growth rate does include the China Joint Venture as well as the CSI contribution.
Thus, of that 160% y/y increase in revenues witnessed during Q3 2021 , not all of that was organic. But as has been the case for a long time with Fulgent, management purposely avoids giving investors enough granularity into the core business. Nevertheless, let’s attempt to go through some back-of-the-envelope calculations.
Let’s presume that approximately 85% of Fulgent’s Core revenues, which have nothing to do with COVID decelerate and grow by approximately 50% to 80% CAGR in 2022, or 75% CAGR at the midpoint. If Fulgent’s Core business, excluding Covid NGS, grew by 75% CAGR in 2022, we are likely to see approximately $238 million in revenues in the Core segment, excluding Covid NGS. The War Chest, 41% Of Market Cap
Anyone interested in Fulgent will undoubtedly know that Fulgent is expected to reach $1 billion of cash and equivalents on its balance sheet by year-end.
Given that as of Q3 2021 Fulgent already had approximately $877 million and the business is meaningful cash flow generative, it doesn’t appear like too big a stretch that in Q4 Fulgent will see $1 billion of cash and equivalents, which is substantial given that its market cap is $2.4 billion. Valuation — Reasonably Priced It’s impossible to get a sense of the profit margins that Fulgent’s Core business gets. We can see in very high operating margins of the business as a whole, but we need to remain mindful that slightly more than 85% of the underlying business derives its revenues from COVID.When that business dwindles away, the margin compression on the underlying business may be substantial. But it’s obviously still going to be worth something, particularly with Omicron in the air, not to mention other variants that will likely emerge over the next twelve months.For simplicity, let’s take $1 billion off the current market cap because that’s the size of its cash balance on its balance sheet. So, investors are left with $1.5 billion, for a business that’s likely to reach $238 million in revenues. Of course, that means investors are paying approximately 6x revenues for Fulgent’s Core business excluding all COVID revenues. But before that, here are a few adjustments. Then, let’s make the case that in 2022, Covid revenues decline by 60% compared with 2021, this would see the Covid business reporting $252 million of revenues. On the one hand, the Covid segment is a very high margin revenue stream, but on the other hand, this business would see meaningfully negative operating leverage.(Source – Company Presentation)For our purposes, let’s assume that Covid ends up 40% operating margin. This figure is slightly higher than Q2 2020 at the onset of COVID, but nowhere near as […]
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